Dubai’s Islamic bank mystery and the case for reform

What’s going on with Dubai Islamic Bank? The emirate’s financial community is abuzz withspeculation, following a spate of arrests of former employees in a widening corruption probe.

Much to the disappointment of business, the details of the inquiry into the city’s largest Islamicbank are a mystery. Also unclear is whether there is any connection to another probe into DeyaarDevelopment, DIB’s real estate affiliate.

Although several people have been detained, the Dubai authorities have not bothered to issuestatements, hold press conferences, or otherwise inform the public about their progress ordisclose whether anyone has been charged.

The police, government and public prosecutor did not even react when a Pakistani banker, one ofthe detainees in the DIB case, alleged that he had been tortured. Rafatul Islam Usmani haspressed charges against the bank, filing his case in the US because, he says, he has no faith inDubai’s legal system.

DIB, which is 30 per cent owned by the government, has said little, beyond telling the market thatthe investigation would not have an impact on its financials. On Sunday, amid all the controversy,the bank won a regional magazine award as the year’s “Best Islamic Bank”.None of this, of course, is a surprise to people who know the Middle East, a region of opaquelegal systems, rife with accusations of human rights abuses. But this is Dubai, an ambitions littlecity-state on a frenetic drive to establish itself as an international business centre.

The emirate has invested in building its brand and in creating the infrastructure that businesswants. Its selling pitch has been remarkably successful: the world’s top financial institutions haveall set up a base there to service a region flooded with petrodollars.

The Dubai International Financial Centre is the main attraction. Created as a sort of superiorparallel system, it promises to apply international standards that are many steps ahead ofdomestic laws. It fancies itself as a future hub of international arbitration, having set up a centre inpartnership with the London Court of International Arbitration. And it has its own corporategovernance institute, with a mandate to promote corporate governance and institution buildingacross the region.

But Dubai’s ambitions do not always square with the realities on the ground. The DIFC’sprotection goes only so far – for all criminal cases it is the United Arab Emirates federal law thatapplies. And that system, as one lawyer says privately, “horribly lags behind the buildings, themoney, the salaries and the marketing of Dubai”.

It is obviously a step in the right direction for the Dubai authorities to be investigating fraudallegations in government-affiliated institutions. The emirate has been desperate to shed theimage of a haven for all sorts of dubious activity, including money laundering (and the centralbank has tightened the rules there). In the past, financial irregularities were quickly swept underthe carpet, avoiding Dubai the embarrassment.

But what is the point of proactive police action unless it carries assurances that detainees aretreated fairly and that the legal system will not be abused? Diplomats tell us that the UAEregulatory and legal system is not as dysfunctional as other places in the Arab world. But a USstate department human rights report is disquieting: it notes that the judiciary’s independence isquestionable and, although the constitution prohibits arbitrary arrest, the law permits indefiniteprolonged detention without appeal. Judges can renew 30-day extensions to the detention periodindefinitely and without charge.

Lawyers and companies flocking to Dubai are well briefed on the shortcomings of the system.Unfortunately, they are loath to criticise it openly, lest they irritate the authorities or lose business.The muted reaction eases the pressure. But if Dubai is to call itself an international financialcentre, then it is in its own interest to be making the case for transparency and legal reformacross the UAE.